Bonds, and other confusing pieces of paper

When our daughter Lucy was born, her grandparents and a few friends of the family gave her savings bonds, to be used for college, or music lessons, or other Good Things. They were generous, to be sure, but they unintentionally gave us a bit of a burden along with their gift.

I mean, think about new parents — stumbling around in a sleepless haze, lucky if they can manage to put on pants right — who decides it’s a good idea to give them pieces of paper that SHOULD NOT BE LOST BECAUSE THEY ARE WORTH MONEY?

Recently, I was going through some old files — bills, insurance records, and other random documents. As I went through them, I saw a vaguely familiar manila folder, with thick red marker on it: IMPORTANT!!! DO NOT LOSE!!!

In a brief moment of sanity, I had apparently put bonds in a special envelope. Once that moment passed, though, I took a more typical course of action, and tossed the envelope in a stack of other papers. Brilliant.

So I’ve now unearthed these bonds, and I’m not really sure what to do with them. Do I have to mail them in somewhere? How do I trade them in to get money? And how much money can I get for them? Or do I have to wait for some specific date in the future before I can do anything with them? Agh. So many questions.

I was really tempted to just shove them back in the stack of papers and “deal with it later.” But I stuck with it, found out some neat stuff, and wanted to share it with you.

What Is A Bond?

Essentially, it’s an I.O.U. from the government. Sometimes companies issue bonds, but if you have “Yay, you had a baby” bonds in a drawer somewhere, they’re probably from the government. The person who bought the bond went to a bank, talked to a teller, and paid some amount (probably half the amount on the face of the bond). That money then went to the government, and helped to build a road or a school building or something.

Every month, the government adds a little bit of money to the value of the bond. And, eventually (like, 20 years after the bond is purchased), it’s worth the full face value.

What Do I Do With A Bond?

You lose it, of course.

No! I’m kidding. Kind of.

At whatever point you want, you cash it in (more on how to do that in a sec). And — good news — if you’ve actually lost the piece of paper, that’s not a problem.

There’s a website the government runs, TreasuryDirect.gov. If you have your bond, you can look up its present value. If you’ve lost your bond, you can look up your (or your child’s) Social Security Number on the site and see what bonds have been issued to you.

How to Turn Your Bond Into Actual Money

So, that website, TreasuryDirect.gov? You can create a profile and redeem your bonds right on that site. You can also just take the bond (again, if you haven’t lost it) in to your bank, and they can cash it for you.

When to Turn Your Bond Into Actual Money

People hem and haw on this question. I’ll make it easy: If you want to keep things simple (I do), I would go ahead and cash it in.

“But my child was given a bond! Won’t the giver be upset?” Ultimately, that’s up to you, but to me, bonds are a bit of a hassle, and despite our gratitude to the givers, the bonds are One More Thing I need to keep track of.

If you have a 529 (college savings account) for your child, deposit the money from the bond into that. (Ask in the comments if you’d like to know more about 529s.)

If the gift is to be used earlier than that — say, for music lessons, set up a “sinking fund” at ING Direct or another easy-to-use bank and keep the money there until you use it. (Nerd alert: ING’s savings accounts currently return 1%. Bonds bought in the last three years are returning 1.4% at most. So ING might be a good option for you.)

You can certainly hold on to the bond if you prefer. The likely reasons the giver gave you a bond as opposed to some other money gift were that:

A. It’s guaranteed to go up in value (where other kinds of investments can lose value), and
B. it’s a gift for The Future.

Well … If you have a savings account set up for The Future, their gift is doing its job. And while you do miss out on the guaranteed increase in value, you probably aren’t missing out on a ton of money, and you might even make more money by putting it into that 529. I’m happy to help run some calculations in the comments, for those of you who want to see actual numbers.

The bottom line: Bonds aren’t something you should be afraid of. They’re also not something that should add to the clutter in your life. If you have a good spot for them to chill, then great.

But if you have any hesitancy about what to do with them, or where to put them, I say visit TreasuryDirect.gov, see what the bonds are worth, and think about redeeming them. The amount of the bond, the date it matures, and the rate of interest it’s earning can all factor in to whether or not cashing it in makes sense. (And as Rebecca Willard notes in the comments below, you can always take them in to your bank and talk with someone there about the pros and cons of cashing in your bonds. That’s their job, and they’ll help you understand the best options for your particular situation.)

In the title of the post, I said there’d be “other confusing pieces of paper.” But I’ve reached my Boring Quotient of the day on bonds, and I want to hear what you are wondering about. What other confusing money papers do you have in your life? Let me know in the comments.